Dr. Frederick Banting, the discoverer of insulin, sold the patent for insulin for a nominal fee because he wanted to give pharmaceutical companies the right to manufacture the drug royalty-free, heading off a potential patent of a competing version that wasn’t as effective. Today, though, the cost of the medication has skyrocketed.

In 1923, Frederick Banting and his research collaborators did something considered a bit scandalous at the time: they sold their patent for insulin to the University of Toronto for $3.

But it wasn’t the dirt-cheap price tag they placed on their intellectual property that raised eyebrows. It was that they decided to patent their discovery in the first place, which was considered an unusual and somewhat unseemly move for scientists and universities at the time.

A lot has obviously changed since then. But as Canada prepares to reform drug pricing regulations almost a century later, one thing hasn’t changed: thanks to the patent system and other factors, the pharmaceutical industry doesn’t operate according to the normal economic laws of supply and demand, posing a challenge for regulators trying to keep both drug manufacturers’ revenues and the Canadian population healthy. It’s a challenge experts say regulators are not living up to.

What happened with insulin demonstrates why. Banting sold the patent for insulin for a nominal fee because he wanted to give pharmaceutical companies the right to manufacture the drug royalty-free, heading off a potential patent of a competing version that wasn’t as effective.

That spirit of altruism didn’t last long. The price of insulin has skyrocketed over time to the point where most diabetic Canadians spend more than three per cent of their incomes on medication and supplies to manage the disease, according to the Canadian Diabetes Association.

The cost of insulin is now frequently held up as an example by people who argue drug prices are out of control and must be regulated more effectively in order to maintain people’s health while reducing health-care spending. On Friday, Health Canada announced changes to how the country regulates drug prices, which it expects to put into effect by the end of 2018.

But Innovative Medicines Canada (IMC), an association representing the country’s manufacturers of patented drugs, warns that slashing prices too quickly and deeply will mean less money for research and development and slower access to new medications.

The pharmaceutical business is fundamentally anti-market, in some ways

Matthew Herder, director, health law institute, Dalhousie University

Canada’s per-capita spending on retail pharmaceutical drugs is the fourth highest in the world, with the country spending $15.5 billion on patented drugs in 2016. But it’s far from the only country grappling with rising costs and, because of the unique economics governing the sector, the issue doesn’t neatly break along pro-market and pro-government intervention lines.

“The pharmaceutical business is fundamentally anti-market, in some ways,” said Matthew Herder, director of the health law institute at Dalhousie University in Halifax. “There are some pretty big structural barriers against competition, which is the tried-and-true way of bringing prices down.”

One structural barrier is the patent system and other monopolies Canada grants drug companies in an effort to incentivize them to develop new medications. The trade-off is that prices tend to inflate in a monopoly system.

Another factor that allows drug pricing to operate outside the normal laws of supply and demand is that the end-user is neither making the purchasing decision nor, in most cases, paying the bill. Doctors write the prescriptions and private insurers or provincial drug benefit programs are usually the ones that pay.

In an effort to rein in some of these inflationary factors, the federal government in 1987 created the Patented Medicine Prices Review Board (PMPRB).

The board was given the power to order drug companies to drop prices it deemed excessive. It is also supposed to force companies to invest 10 per cent of their revenue on research and development in Canada, but there was a catch: the companies received even better patent protection for new drugs in exchange.

The PMPRB, in deciding whether a drug price is excessive, considers prices from a list of countries where drug companies spend a lot of money on research and development — including the U.S., which has the highest drug prices in the world. The idea is to keep prices high enough that the pharmaceutical industry can afford to invest similar amounts of money on research in Canada.

But the drug companies may not be keeping their R&D spending promises. The PMPRB’s most recent annual report found patented drug makers spent just 4.4 per cent of their revenues on research in Canada, though IMC counters that the board’s definition of what counts as R&D spending is too narrow.

Any researcher who says the price of drugs in one country, even in the United States, is somehow a driver of global innovation, is fooling themselves

Steve Morgan, professor, population and public health, University of British Columbia

Citing a 2008 report by the Organisation for Economic Co-operation and Development, IMC also contends a correlation exists between a country’s drug prices and research investment. The federal government assumed those two variables were linked when it created the PMPRB.

Steve Morgan, a professor in the school of population and public health at the University of British Columbia in Vancouver, said that assumption isn’t backed up by evidence.

He said independent researchers generally agree pharmaceutical companies don’t make decisions about where to invest their R&D money based on a country’s drug prices.

“Any researcher who says the price of drugs in one country, even in the United States, is somehow a driver of global innovation, is fooling themselves,” Morgan said. “The reality is it’s a very large global industry and you actually have to work out how price paradigms work in the global market.”

Health Canada is now proposing to remove some of the countries with the highest drug prices from the PMPRB’s list and add others in an effort to bring costs closer to the global median. Additionally, the government department plans to allow the PMPRB to consider the pharmaceutical benefits of the drug, the size of the market for the medicine and Canada’s ability to pay for it when making price decisions.

IMC president Pamela Fralick said her members aren’t opposed to modest price cuts, but said deep ones will have ramifications for access to medicine and research.

“Canada, as far as we understand it, has never aspired to be a middle-of-the-road, median country,” she said. “We need to make sure the countries we’re choosing to compare ourselves with aren’t solely based on price alone.”

Fralick also warned that pharmaceutical companies tend to launch new medicines in countries with higher drug prices first, which means Canadians could face longer waits for new therapies if tough pricing rules are put in place.

“There is a direct correlation between the price of medicine and whether and how Canadians get access to them,” she said. “The lower the price, the less access, because global companies simply aren’t launching products into those countries.”

But while above-average drug prices are certainly good for the pharmaceutical industry, they also represent a cost to the public and other sectors of the economy, said Michael Law, a professor at the University of British Columbia who holds the Canada research chair in access to medicines. He points out that every dollar spent on drugs represents a dollar that can’t be spent on something else.

“If you’re not spending it on hospitals, or physicians, or other effective therapies, that’s going to have an impact on patients,” he said. “On the employer side of things, if you’re spending more money than you ought to on a particular drug, that’s money coming out of employee wages in the long term.”

The maximum price for drugs set by the PMPRB affects private-sector insurers more than public plans. The provinces have leverage to negotiate better prices by threatening to drop coverage for medications they think are too expensive, but private-sector insurers are often locked into employee benefit packages that guarantee coverage of all prescription drugs.

“The cost of benefit plans is a cost that’s ultimately borne by employees,” Law said. “Canadians are living with lower wages as a result of high drug costs.”

Barbara Martinez, practice leader of drug benefit solutions at The Great-West Life Assurance Co., said sky-high drug costs have affected the company’s bottom line. Over the past five years, Great-West Life has increasingly adopted measures to help employers save money, such as negotiating for lower prices where possible and capping the annual amount an employee can claim for drugs in some workplace plans.

Charles Best, left, and Frederick Banting, with the famous diabetic dog, Marjorie, whose role in lab experiments was critical to the isolation of insulin and Morjorie’s successful treatment for the disease.Courtesy Thomas Fisher Rare Book Library, U of T

“This is really, really unaffordable and unsustainable,” Martinez said. “We’re very supportive of what (Health Canada) is trying to do to bring back some better pricing to the Canadian marketplace.”

Of course, the proposed reforms aren’t the only way to address the effects of high drug prices on the economy and public health. Other suggestions made by experts include basing price regulation on the performance of the drug, requiring drug manufacturers to be more transparent about the deals they negotiate with insurers, and reforming the patent system to encourage the discovery of drugs with the biggest health benefits.

Dalhousie professor Herder said he would like to see university researchers display the type of creativity with patents that Frederick Banting displayed way back in 1923.

Pharmaceutical companies today generally get full control over how their drugs are licensed and priced when making patent deals with publicly funded researchers, but Herder said he’d like to see the scientists bargain a little harder for the right to make decisions that are also in the public interest.

“It’s historical, but it’s no less possible today,” he said. “It’s time to experiment.”